Economic Impact Analysis of Credit Guarantee Schemes in Eswatini: Exploring the relationship between A Case of the Small Scale Enterprise Loan unemployment and mental illness among the Guarantee Scheme (SSELGS) youth in selected communities of Eswatini. By Maqhawe Zwane 2019 Economic Impact Analysis of Credit Guarantee Schemes in Eswatini: A Case of the Small Scale Enterprise Loan Guarantee Scheme (SSELGS) By Maqhawe Zwane Abstract Using data from 315 beneficiaries of the Small Scale Enterprise Loan Guarantee Scheme, this study assesses the impact of the Small Scale Loan Guarantee Scheme. The study assessed both the financial and economic additionality of the scheme. The study used a structured questionnaire and face-to-face interviews to elicit data from beneficiaries whereas key informant interviews were used to elicit data from participating banks. The study also assessed visibility of the scheme as well as its efficiency in terms of loan approval period and claim processes. From the sampled beneficiaries, 174 SMEs would not have accessed credit if the scheme was non-existent. Collectively, these SMEs received E42, 918,616.00. On the other hand, 72 of the 174 started new businesses and at the time of the interview, they collectively employ 681 people. The study found that the default rate is high at 44.3 %. The approval period of loan application varies widely, with some respondents reporting a period of less than a month while others reported a period of up to four years. The study concludes that the scheme has made a positive impact in both financial and economic additionality. However, two factors (inefficiency in scheme’s operation and high default rate) threaten the scheme’s existence. It is therefore a recommended that scheme managers should put measures to curb the default rate and improve the efficiency and visibility of the scheme. Key Words: Small Scale Enterprise Loan Guarantee Scheme, Small and Medium Enterprises, Economic additionality, Financial additionality 1. INTRODUCTION 1.1. Small and Medium Enterprises in Eswatini entrepreneurial environment The SME National Policy of Eswatini of 2009 defines small and medium enterprises (SMEs) as companies with no more than 60 employees and a maximum turnover of E8 million. SMEs play a critical role in the economy of Eswatini, accounting for 90% of the country’s businesses and providing around three-quarters of all private sector jobs. According to statistics from the Micro, Small, and Medium Enterprise (MSME) survey by FinMark Trust, at the end of 2017, the number of SMEs in Eswatini was 68,536 with 92,643 employees, which accounts for 63.2% of total employment in the country. However, in the process of development, SMEs in Eswatini face many difficulties and challenges. According to the FinScope survey 2017, the major limitations of the SME sector in Eswatini are: Fragmented enterprise structure (nearly 80% of Eswatini companies are micro- enterprises); Lack of a strong stratum of medium-sized enterprises (the proportion of Eswatini medium-sized enterprises is below 1%); 1 The majority of companies lack sufficient/acceptable collateral; high rate of tax evasion; many enterprises were founded out of necessity; Relatively low productivity (weak ability to create added value); Ageing management (succession problems); Insufficient financial knowledge; Lack of access to market; Low willingness-to-innovate. One of the major difficulties of SMEs is accessing capital from banks and credit institutions due to lack of acceptable collateral. To solve this problem, Eswatini has used different financial tools to help SMEs easily access finance. One of the effective financial instruments Eswatini has applied is the loan guarantee system. 1.2. Loan guarantee schemes in Eswatini Eswatini currently has two guarantee schemes that are housed at the Central Bank of Eswatini (CBE); the Small Scale Enterprise Loan Guarantee Scheme (SSELGS) and the Export Credit Guarantee Scheme (ECGS). Established in 1990 and re-launched in 2010, the main objective of the schemes is to circumvent, largely, the issue of collateral by acting as an assurance to banks in the absence of acceptable collateral from SMEs that want to access finance through the country’s banks. The SSELGS has three specific objectives. Firstly, to establish a loan guarantee fund that would encourage participating financial institutions (commercial banks) to increase lending to small-scale enterprises in Eswatini. This reduces the financial risk faced by lending institutions. The second objective is to promote increased participation of Emaswati in the economic activities, particularly in sectors suitable for small-scale operations, and to improve their competitiveness. The last objective of the scheme is to stimulate efficient localisation of small-scale businesses by providing adequate capital to take over existing shops and workshops or to establish new ones. According to information sourced from the SSLEGS main report of 2016, the target group for the scheme is small-scale domestic enterprises that are start-ups or already engaged in business. For businesses to qualify for the scheme, they should have a total turnover that does not exceed E8 million per annum and should be owned either by a national of Eswatini or by a legal entity in which Eswatini nationals have at least 75% ownership and effective control. The scheme does not guarantee the entire load and the portion of the loan guaranteed depends on whether the business is a start-up or already existing. For start-up businesses, up to 95% of the loan is guaranteed, and for existing businesses up to 85% of the loan is guaranteed. The report further reveals that the guarantee remains active until the credit is repaid in full, unless the financial institution and the Fund (Guarantor) agree otherwise, in writing. The participating financial institutions are responsible for assessing a proposed project if it is financially and technically sound before giving out a loan. The maximum amount to be loaned should not exceed E500,000.00 per loan application whilst the repayment period is up to five years for short-term loans and up to ten years for long-term loans. Each business is eligible to use the scheme only twice. Owners of start-up businesses undergo entrepreneurship training and mentoring (provided by a Government accredited service 2 providers) for a minimum of four weeks. Once a borrower fails to repay the loan and the lending financial institution has exhausted all efforts to recover it, the financial institution can invoke the guarantee fund to settle the loan or part of it. Information sourced from the SSLEGS main report (thereafter referred to as the SSLEGS Report), suggests that as at June 2016, the total number of loans guaranteed had reached 1,191 (251 outstanding loans) for a total value of loans amounting to E100.5 million. Of these, 59.7% (E60 million) was for paid-up loans while the remainder represents the outstanding loan portfolio guaranteed at E40.5 million (40.3% of the total value of the scheme). In terms of the largest beneficiaries of the scheme, the retail sector came first at 58.6% of issued loans, with the remainder going to the manufacturing (5.5%), transport (3.9%), services (24.1%), and agriculture (1.3%) sectors. The SSLEGS Report further documents that the default rate stood at 5.28% in June 2016. Given that SMEs have come to be seen as major players in stimulating economic growth and increasing employment (OECD, 2000), providing support and other ancillary services to SMEs is therefore crucial for stimulating economic growth. To be clear, the government of Eswatini sees SMEs as key in the fight against unemployment, poverty, and hunger (NDS of 1997, revised 2014). However, issues of financial exclusion due to primarily lack of collateral and targeted support to SMEs have meant that the sector contributes very little to GDP production in Eswatini. The literature shows that for a country to develop, it has to have a vibrant SME sector (Grater et al., 2017). Moreover, for SMEs to perform well and contribute to economic growth they need to have access to financial services. Recognising this, the Government of Eswatini through the Central Bank of Eswatini (CBE) introduced the SSELGS. Implicit to the introduction of the scheme is the assumption that the major stumbling block for SMEs when applying for loans is the lack of collateral. However, even with the presence of the scheme, SMEs in Eswatini still face some difficulties when it comes to accessing loans. Available evidence shows that in most cases SMEs are either not given the loans at all or the loans are issued very late, which becomes a great inconvenience to the entrepreneurs, thus raising questions regarding what more can the government do to support SMEs. Given that the scheme has been operational for 27 years without any comprehensive and documented evaluation, it is undeniable that an evaluation exercise is long overdue. Against this backdrop, this study seeks to evaluate the SSELGS through assessing the additionality effect of the scheme. The rest of the paper is organised as follows; section 2 presents the review of related literature. Section 3 presents data and methods used while section 4 presents the results and discussion. Lastly, section 5 presents the conclusion and recommendations. 2. LITERATURE REVIEW 2.1. SMEs in Eswatini and their role There is no single global definition for SMEs, mainly due to divergences in economic structures and stages of development. Globally, most countries have developed their own definitions in an effort to craft appropriate and effective policies and programmes for SMEs to fit its context and economic circumstances. The European Commission defines a SME as any business characterised as micro, small or medium. However, it is only proper to define SMEs in the context of Eswatini where the SME National Policy classifies these entities as a continuum, from informal micro-enterprises to formal medium-sized enterprises.